Form 10-Q
                           UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549

                                           


       [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934
                                              
         For the quarterly period ended September 30, 1997

                                OR

      [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934
                            
  For the transition period from                 to              

                    Commission File No. 1-4778


                      TALLEY INDUSTRIES, INC.
      (Exact name of registrant as specified in its charter)

             Delaware                             86-0180396
   (State or other jurisdiction of             (I.R.S. Employer
    incorporation or organization)            Identification No.)
                                                                         
   2702 North 44th Street - Suite 100-A, Phoenix, Arizona  85008
(Address of principal executive offices)                (Zip Code)

 Registrant's telephone number, including area code:(602) 957-7711

(Former name, former address and former fiscal year, if changed since last
report)

 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirement for the past 90 days.

       YES[ X ]                                  NO[   ]   

 Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

                                                    Outstanding at
Class of Common Stock                             September 30, 1997 
---------------------                             ------------------
 $1.00 par value                                       14,113,623


==========================================================================




<PAGE>

             TALLEY INDUSTRIES, INC. AND SUBSIDIARIES



                               INDEX



                                                            PAGE NO.

PART I  - FINANCIAL INFORMATION


   Consolidated Balance Sheet -
     September 30, 1997 and December 31, 1996                  1

   Consolidated Statement of Earnings -
     Three Months and Nine Months Ended September 30, 1997
     and 1996                                                  2

   Consolidated Statement of Cash Flows -  
    Nine Months Ended September 30, 1997 and 1996              3

   Consolidated Statement of Changes in Stockholders'
     Equity -Nine Months Ended September 30, 1997 and 1996     4

   Notes to Consolidated Financial Statements                 5-8

   Management's Discussion and Analysis                       9-17





PART II -  OTHER INFORMATION


   Legal Proceedings                                          18 
                                                            
   Exhibits and Reports on Form 8-K                           18

   Signatures                                                 19
















<PAGE>

                  PART I - FINANCIAL INFORMATION

             TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
                    Consolidated Balance Sheet
                           (thousands)

                                               September 30,     December 31,
ASSETS                                             1997             1996    
                                               -------------     ------------
  Cash and cash equivalents                       $ 40,957        $ 48,758 
  Accounts receivable, net of allowance for
    doubtful accounts of $1,228 at September
    30, 1997 and $925 at December 31, 1996          50,609          53,090 
  Inventories, net                                  67,207          64,684 
  Deferred income taxes                              3,800           3,660 
  Prepaid expenses                                   7,361           6,100 
                                                  --------        --------
    Current assets                                 169,934         176,292 

  Property, plant and equipment, net                53,298          49,324 
  Intangibles                                       38,296          41,965 
  Deferred charges and other assets                 17,114          12,804 
                                                  --------        --------
     Total assets                                 $278,642        $280,385 
                                                  ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current maturities of long-term debt            $  3,010        $  5,522 
  Accounts payable                                  24,016          20,116 
  Accrued expenses                                  37,251          44,189 
                                                  --------        --------
     Current liabilities                            64,277          69,827 

  Long-term debt                                   122,946         123,185 
  Deferred income taxes                              3,650           2,179 
  Other liabilities                                 10,686          10,708 

  Stockholders' equity:
    Preferred stock, $1 par value,
      authorized 5,000,000 shares:
        Series A                                        14              14 
        Series B                                       749             750 
    Common stock, $1 par value,         
      authorized 20,000,000 shares                  14,114          14,618 
  Capital in excess of par value                    75,534          79,884 
  Foreign currency translation adjustment              (34)           (562)
  Accumulated deficit                              (13,294)        (20,218)
                                                  --------        --------
      Total stockholders' equity                    77,083          74,486 
                                                  --------        --------
        Total liabilities and 
          stockholders' equity                    $278,642        $280,385 
                                                  ========        ========


The accompanying notes are an integral part of the financial statements.

                                     -1-

<PAGE>
              TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 Consolidated Statement of Earnings
                (thousands, except per share amounts)

                                          Three Months          Nine Months
                                             Ended                 Ended
                                          September 30,         September 30,  
                                        ------------------   ------------------
                                          1997      1996       1997      1996   
                                        --------  --------   --------  --------
Sales                                   $ 67,184  $ 76,667   $200,389  $219,256
Services                                  20,627    17,082     62,896    49,904
Royalties                                    179   109,023        891   122,709
                                        --------  --------   --------  --------
                                          87,990   202,772    264,176   391,869
                                        --------  --------   --------  --------
Cost of sales                             48,364    70,115    146,267   177,808
Cost of services                          18,481    15,168     56,316    44,036
Selling, general,
and administrative expenses               14,547    12,761     49,910    47,574
Provision (reversal) of
  reserves on realty assets                    -    85,000     (6,300)   85,000
                                        --------  --------   --------  --------
                                          81,392   183,044    246,193   354,418
                                        --------  --------   --------  --------
Earnings from operations                   6,598    19,728     17,983    37,451
Other income (expense), net                 (435)   16,780        320    14,587 
                                        --------  --------   --------  --------
                                           6,163    36,508     18,303    52,038
Interest expense                           3,589     6,694     10,910    21,066 
                                        --------  --------   --------  --------
Earnings before income taxes
  and extraordinary loss                   2,574    29,814      7,393    30,972 
Income tax provision                         219       502        469     1,575
                                        --------  --------   --------  --------
Earnings before extraordinary loss         2,355    29,312      6,924    29,397 
Extraordinary loss                             -         -          -    (1,642)
                                        --------  --------   --------  --------
  Net earnings                          $  2,355  $ 29,312   $  6,924  $ 27,755 
                                        ========  ========   ========  ========

Earnings applicable to common shares    $  2,164  $ 29,121   $  6,351  $ 14,813 
                                        ========  ========   ========  ========
Earnings (loss) per share of common 
stock and common stock equivalents:
Earnings before extraordinary loss      $    .15  $   1.85   $    .45  $   1.93 
Extraordinary loss                             -         -          -      (.11)

Net earnings before consideration for
  induced conversion of preferred stock      .15      1.85        .45      1.82 
Assumed value of conversion inducement         -         -          -      (.79)
                                        --------  --------   --------  --------
  Earnings applicable to common shares  $    .15  $   1.85   $    .45  $   1.03 
                                        ========  ========   ========  ========

Weighted average shares outstanding       14,156    15,855     15,246    15,202
                                        ========  ========   ========  ========
The accompanying notes are an integral part of the financial statements.
                                     -2-
<PAGE>
                TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 Consolidated Statement of Cash Flows
                              (thousands)
                                                       Nine Months Ended
                                                         September 30,  
                                                      --------------------
                                                        1997        1996  
                                                      --------    --------
Cash and cash equivalents at beginning of year        $ 48,758    $ 10,475
                                                      --------    --------
Cash flows from operating activities:
  Net earnings                                           6,924      27,755 
  Adjustments to reconcile net income
    to cash flows from operating activities:
     Change in deferred income taxes                     1,331      (3,099)
     Depreciation and amortization                       6,684       6,628
     Original discount amortization                          -       7,929
     Loss on sale of subsidiary and product line         1,325           -
     Provision (reversal) of reserve on realty assets   (6,300)     85,000
     Other                                               1,318      15,425
  Changes in assets and liabilities, net of
    effects from acquired businesses:
     (Increase)decrease in accounts receivable            (533)     17,028 
     Increase in inventories                            (6,910)       (329)
     (Increase) decrease in prepaid expenses            (6,431)        476 
     Decrease in realty assets                               -       3,967
     Increase in accounts payable                        3,900       3,289 
     Increase in accrued expenses                        1,053       8,172 
     Increase (decrease) in other liabilities              493        (588)
     Other, net                                           (186)      2,863 
                                                      --------    --------
      Cash flows from operating activities               2,668     174,516 
Cash flows from investing activities:
  Proceeds from sale of subsidiary and product line      6,162           -
  Investment in joint-venture                           (3,510)          -
  Purchase of assets of acquired business                    -      (4,327)
  Purchases of property and equipment                   (9,921)     (4,675)
  Reduction of income tax receivables                    4,400           -
  Reduction in other assets                                 97         370
  Proceeds from sale of property and equipment              78         150
                                                      --------    --------
   Cash flows from investing activities                 (2,694)     (8,482)
Cash flows from financing activities:
  Preferred stock conversion cost                            -       3,637 
  Payment of dividends                                    (573)          - 
  Purchase of common stock                              (4,339)          -
  Common stock issued                                       57           -
  Repayment of long-term debt                           (2,920)    (18,694)
  Proceeds from borrowings under line of credit              -     375,213
  Reduction in borrowings under line of credit               -    (385,792)
                                                      --------    --------
   Cash flows from financing activities                 (7,775)    (25,636) 
Net decrease in cash and cash equivalents               (7,801)    140,398
                                                      --------    --------
Total cash and cash equivalents at September 30,      $ 40,957    $150,873
                                                      ========    ========
The accompanying notes are an integral part of the financial statements.

                                     -3-     
<PAGE>                                     
<TABLE>
<CAPTION>
                             TALLEY INDUSTRIES, INC. AND SUBSIDIARIES

                     Consolidated Statement of Changes in Stockholders' Equity
                       For the Nine Months Ended September 30, 1997 and 1996
                                            (thousands)



                                                                               Capital in   Retained 
                                             Preferred Stock          Common    Excess of   Earnings
                                     Series A   Series B   Series D    Stock    Par Value   (Deficit)
                                     --------   --------   --------   -------   ---------   --------
<S>                                  <C>        <C>        <C>        <C>       <C>         <C>                    
BALANCE AT DECEMBER 31, 1995         $   67      $1,548     $  120    $10,053    $86,035    $(38,959)

Net earnings                                                                                  27,755  
Conversion to common stock              (53)       (798)      (120)     4,007     (3,438)     
Common stock issued                                                       792      3,247           
                                     ------      ------     ------    -------    -------    --------
BALANCE AT SEPTEMBER 30, 1996        $   14      $  750     $    -    $14,852    $85,844    $(11,204)
                                     ======      ======     ======    =======    =======    ========

BALANCE AT DECEMBER 31, 1996         $   14      $  750     $    -    $14,618    $79,884    $(20,218)
Net earnings                                                                                   6,924
Dividends - preferred stock                                                         (573)
Stock grant                                                                 6         51
Conversion to common stock                           (1)                    1
Common stock retirements                                                 (511)    (3,828)          
                                     ------      ------     ------    -------    -------    --------
BALANCE AT SEPTEMBER 30, 1997        $   14      $  749     $    -    $14,114    $75,534    $(13,294) 
                                     ======      ======     ======    =======    =======    ========
</TABLE>





The accompanying notes are an integral part of the financial statements.




















<PAGE>

             TALLEY INDUSTRIES, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements



Note 1 - General

    In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 30, 1997 and December
31, 1996 and the results of operations for the three-month and
nine-month periods ended September 30, 1997 and 1996, and cash
flows and changes in stockholders' equity for the nine-month
periods ended September 30, 1997 and 1996.  Such results, however,
may not be indicative of the results for the full year.
    For additional information regarding significant accounting
policies, and accounting matters applicable to the Company,
reference should be made to the Company's Annual Report to
Shareholders for the year ended December 31, 1996.

Note 2 - Inventories
--------------------

   Inventories are summarized as follows (in thousands):

                                     September 30,   December 31,
                                         1997            1996    
                                     -------------   ------------
   Raw materials and supplies          $12,710         $10,995
   Work-in-process                      11,311          11,564
   Finished goods                       26,784          26,158
   Inventories applicable to
     government contracts               16,402          15,967
                                       -------         -------
                                       $67,207         $64,684
                                       =======         =======

Note 3 - Earnings Per Share
---------------------------

   Earnings per share of Common stock and Common stock equivalents
has been computed on the basis of the average number of Common
shares outstanding during each period.  The average number of
shares has been adjusted for assumed exercise at the beginning of
the period (or date of grant, if later) for any dilutive stock
options, with funds obtained  thereby  used  to  purchase shares of








                                     -5-

<PAGE>

Note 3 - Earnings Per Share, continued
--------------------------------------

the Company's Common stock at the average price during the period,
and assumed conversion of all dilutive convertible Preferred stock. 
Common stock equivalents that are anti-dilutive are excluded from
the computation of earnings per share and earnings are reduced by
the dividend requirements on such equivalents.

Note 4 - Acquisition and Dispositions
-------------------------------------

   In May 1997, a subsidiary of the Company sold certain assets
of the connector product line.  Proceeds include a note receivable
for $1.9 million and cash of $.2 million.
   In March 1997, the Company sold the assets of its Canadian
steel distributor.  Cash proceeds from the sale were $4.1 million. 
The purchaser assumed $2.3 million of liabilities.
   In January 1996, a subsidiary of the Company acquired certain
assets of a manufacturer of a silicone wire product line.  The
purchase price was approximately $4.3 million.

Note 5 - Preferred Stock Conversions
------------------------------------

   On February 16, 1996, the Company issued 1,905,849 shares of
Talley Common stock in connection with the conversion of  all of
the Company's Series D Preferred stock, 702,919 more shares than
originally designated.  The conversion automatically extinguished
all unpaid dividends on that stock, totaling approximately $2.6
million as of December 31, 1995.  
   On April 22, 1996, pursuant to a conversion offer with respect
to the Company's Series B and Series A Preferred stock,
approximately 798,000 shares or approximately 52% of the
outstanding shares of Series B and approximately 53,000 shares or
approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock
for each outstanding Series B share.  Series A holders who
converted received 2.0 shares of Common stock for each outstanding
Series A share.  Common stock issued of approximately 1,995,000
shares in connection with the conversion  of  Series B Preferred
stock and approximately 106,000 in connection with the conversion
of Series A Preferred stock was approximately 948,000 and 56,000
more shares than issuable under the stated conversion terms of the
respective series of preferred stock.  Prior to the  conversion
there were approximately 1,548,000 shares of Series B outstanding
and 67,000 shares of Series A outstanding.  The conversion
automatically extinguished all unpaid dividends on the Series B and
Series A shares that were converted totaling approximately $4.0
million ($5 per share) on the Series B Preferred stock and totaling
approximately $0.3 million ($5.50 per share) on the Series A
Preferred stock at March 31, 1996.




                                     -6-

<PAGE>

Note 5 - Preferred Stock Conversions, continued
-----------------------------------------------

   The transactions did not impact the net earnings of the Company
in 1996, but "earnings applicable to common shares (after deduction
of preferred stock dividends)," as supplementally disclosed by the
Company, and the "earnings per share of common stock and common
stock equivalent share" were reduced.  The excess of the fair value
of the common shares transferred in the transactions by the
Company, over the fair value of the common shares issuable pursuant
to the stated conversion terms of the preferred stock, were
subtracted from net earnings in the calculations of net earnings
available to common shareholders and earnings per share.

Note 6 - Bonds Repurchased and Covenant Defeasance
--------------------------------------------------

   During 1996, the Company repurchased $124.0 million aggregate
principal amount of the Senior Discount Debentures with an accreted
value of $97.4 million at the repurchase dates.  The purchase price
of the debentures was $106.0 million, including accrued interest
and prepayment premiums.  The Company recognized $12.1 million in
extraordinary losses in connection with the repurchases of the
Senior Discount Debentures.  This amount represents the prepayment
premium and deferred debt cost on the extinguished debt.  During
the nine months ended September 30, 1997, the Company repurchased
an additional $.3 million aggregate principal amount of the Senior
Discount Debentures.  
   An investment was made in U.S. Treasury obligations and placed
in trust in June 1997 to effect a covenant defeasance of the
remaining $1.9 million principal amount of outstanding debentures.
For financial reporting purposes, the assets held in trust are
included in the assets of the Company and the outstanding
debentures continue to be reflected as outstanding debt.  The
debentures will be redeemed on October 15, 1998, which is the
earliest optional redemption date.

Note 7 - Repurchase of Common Stock
-----------------------------------

   In late 1996 and early 1997, the Board of Directors approved
the repurchase of up to 950,000 shares of the Company's Common
stock, on  the open market or in  negotiated  transactions, from
time to time, at prices deemed appropriate by the Company's
officers, with such shares to be retired as authorized but 
unissued  shares.  At December 31, 1996, the total number of shares
of common stock repurchased was 277,300 shares for a total cost of
approximately $2.1 million.  During the first half of 1997, another
510,367 shares were repurchased for a total cost of approximately
$4.3 million. 






                                     -7-

<PAGE>


Note 8 - Agreement and Plan of Merger
-------------------------------------

   On September 26, 1997, the Company announced that it had
entered into a definitive Agreement and Plan of Merger (Agreement)
with Carpenter Technology Corporation (Carpenter) to be acquired
for cash.
   Under the terms of the Agreement, Carpenter commenced an all-
cash tender offer on October 2, 1997 for all outstanding shares of
Talley stock at a price of $12 per share of Talley Common stock,
$16 per share of Talley Series B Preferred stock, and $11.70 per
share of Talley Series A Preferred stock.  Assuming a majority
(measured by aggregate voting power) of Talley's stock is duly
tendered under the tender offer and not withdrawn before the
expiration date of the offer (December 4, 1997, unless extended),
Carpenter is obligated under the terms of the Agreement to purchase
all shares of Talley stock tendered and not withdrawn, and is
further obligated to complete as soon as possible an all-cash
merger whereby all Talley shares remaining outstanding will be
acquired for cash at the same per-share prices as under the tender
offer.  The tender offer is also subject to other customary
conditions, including expiration of the Hart-Scott-Rodino (HSR)
waiting period.  The U.S. Department of Justice, Antitrust Division
(DOJ) has requested that the Company and Carpenter provide DOJ
certain additional information, which has the effect of
automatically extending the HSR waiting period.  The Company and
Carpenter have advised DOJ that they intend to provide the
requested information as soon as possible.
   In connection with the tender offer and proposed merger,
Carpenter, the Company and certain of its present and former
directors were named as defendants in various purported class
action complaints filed on behalf of the stockholders of the
Company.  The complaints alleged, among other things, breach of
fiduciary duty on the part of the Board of Directors arising out of
the Merger Agreement and failure to disclose material information. 
On October 16, 1997 a Memorandum of Understanding was entered into
by counsels for the plaintiffs and defendants requiring the Company
to amend and supplement the disclosure contained in its filings
with the Securities and Exchange Commission-Schedule 14D-9.  In
exchange, the plaintiffs agreed to dismiss the actions.  The
settlement is subject to various conditions, including Court
approval.
   The foregoing summary of certain provisions of the Agreement
is general in nature and is qualified in its entirety by reference
to the definitive Agreement, which is an Exhibit to this Report. 
No assurance can be given that the conditions to the consummation
of the tender offer and the merger under the Agreement will be
fulfilled or as to the timing for consummation of the tender offer
or the merger.






                                     -8-

<PAGE>             
             
             TALLEY INDUSTRIES, INC. AND SUBSIDIARIES

               Management's Discussion and Analysis
         of Financial Condition and Results of Operations


   The following is management's discussion and analysis of
certain significant factors which have affected the Company.  A
summary of period-to-period changes in the consolidated statement
of earnings is shown below (in thousands):
                         
                                 Three Months        Nine Months
                                    Ended               Ended
                                 September 30,       September 30,  
                              ------------------  ------------------
                                1997      1996      1997      1996  
REVENUES:                     --------  --------  --------  --------
 Government Products
   and Services               $ 37,648  $ 36,906  $117,775  $105,877
 Airbag Royalties                    -   108,520         -   121,913
 Stainless Steel Products       29,337    34,418    88,711   105,954
 Industrial Products            18,608    20,077    55,293    53,777
 Realty                          2,397     2,851     2,397     4,348
                              --------  --------  --------  --------
                              $ 87,990  $202,772  $264,176  $391,869
                              ========  ========  ========  ========
OPERATING INCOME:
 Government Products
   and Services               $  2,420  $ (1,421) $ 11,476  $  3,372
 Airbag Royalties                    -   135,367         -   148,760
 Stainless Steel Products        1,740      (509)    6,770     9,351
 Industrial Products             1,654    (7,082)    4,428    (5,996)
 Realty                          2,346   (86,005)    8,656   (88,506)
                              --------  --------  --------  --------
   Total operating income        8,160    40,350    31,330    66,981
 Corporate expense              (2,575)   (4,889)  (14,715)  (16,202)
 Non-segment interest
   income                          578     1,047     1,688     1,259
 Interest expense               (3,589)   (6,694)  (10,910)  (21,066)
                              --------  --------  --------  --------
   Earnings before 
   income taxes and
   extraordinary loss         $  2,574  $ 29,814  $  7,393  $ 30,972
                              ========  ========  ========  ========

    Revenues for the nine-month period ended September 30, 1997
decreased $127.7 million when compared with the corresponding
period in the prior year.  Earnings before income taxes and
extraordinary loss for the nine months ended September 30, 1997 was
$7.4 million compared with $31.0 million in the first nine months
of the previous year.  Included in the results for periods ended
September 30, 1996 were payments received from TRW Inc. of $156.4
million to settle the airbag royalties litigation.  This amount,
which represents a settlement for airbag royalties and certain 


                                     -9-

<PAGE>

other matters, reimbursement of litigation costs and interest from
the date of award until paid, was partially offset by a provision 
for reserve on realty assets of $85.0 million.  Royalties from
automotive airbags ceased with the payments from TRW.  Revenue
increases for the first nine months of 1997 from the Company's
Government Products and Services segment (primarily from the naval
architectural and engineering unit) were offset by decreases in
stainless steel revenues resulting from the March 1997 sale of the
Canadian steel distributor and from lower sales, as competitive
pressures from United States and foreign suppliers affected the
sales volume and sales prices.
    During the nine months ended September 30, 1997 operating
income from the Government Products and Services segment and the 
Realty segment increased when compared with the first nine months
of 1996. The prior year's operating income for the Realty segment
included an $85.0 million provision for reserves on realty assets;
while the current year's operating income included $6.3 million
realty asset reserve reversals, with the disposition of the
remaining property.  Prior year operating income included
writedowns of goodwill and inventories in the Stainless Steel
Products and the Industrial Products segments, as well as a non-
recurring charge in the Government Products and Services segment
regarding defense contract costs and claims.
    The gross profit percentage, excluding  airbag  royalties and
realty, was 23.3% for the nine months ended September 30, 1997, up
from the gross profit percentage of 17.8% for the comparable period
in 1996.  The gross profit percentage in 1996 was below historical
levels due to non-recurring inventory and goodwill writedowns.  The
1997 gross profit percentage is comparable to the 23.4% experienced
by the Company during the first nine months of 1995.
    Net earnings for the nine months ended September 30, 1997 were
$6.9 million compared to net earnings of $27.8 million for the same
period in the prior year.  Prior year's results included a $1.6
million extraordinary loss relating to the repurchase of the Senior
Discount Debentures.

    GOVERNMENT PRODUCTS AND SERVICES.  Revenue and operating
income for the nine months ended September 30, 1997  increased by
$11.9 million and $8.1 million, respectively, when compared with
the same period in the prior year, primarily the result of an
increase in service revenues from the Company's naval architectural
and engineering unit and favorable results upon conclusion, or the
timing of completion, of certain other contracts.  Earnings were
also favorably impacted in 1997 when compared with 1996, as a
result of reimbursement of past research and development cost by a
joint venture partner working with the Company in the development
of automotive airbag inflators.  Increases in research and
development costs reduced earnings in 1997 and 1996 and a non-
recurring charge in the third quarter of 1996 regarding defense
contract costs and claims further reduced prior year earnings.






                                     -10-

<PAGE>

    AIRBAG ROYALTIES.  As described in the Notes to the
Consolidated Financial Statements for the year ended December 31,
1996, the quarterly royalty payments ceased with the payments
received from TRW in the third quarter of 1996.  Airbag royalties
in the first nine months of 1996 were $121.9 million.  This amount
included a portion of the payments received from TRW to settle the
airbag royalties litigation.

    STAINLESS STEEL PRODUCTS.  During the first nine months of
1997,  sales  for  the Stainless Steel Products segment decreased
$17.2 million, and operating income decreased $2.6 million, when
compared with the same period in 1996.  Revenue and earnings were
affected by the sale of the Canadian steel distributor in March
1997, and by lower sales, as competitive pressures from United
States and foreign suppliers affected the sales volume and sales
prices.

    INDUSTRIAL PRODUCTS.  In the nine-month period ended September
30, 1997, Industrial Products sales increased $1.5 million while
operating income increased $10.4 million, when compared with the
same period in 1996.  The prior year's earnings were affected by
inventory and goodwill writedowns in the third quarter of 1996.
Increases in sales and operating income also resulted from
increased orders for insecticides and air fresheners. 

    REALTY. In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets.  With the
receipt of $156.4 million from TRW to settle the airbag royalty
dispute in the third quarter of 1996, and also in view of the
slower than expected improvement in the market conditions for real
estate assets, the Company re-evaluated and changed its strategy
for exiting the real estate business.  The Company adjusted its
strategy of selling properties to end users in an orderly process
over time, to a strategy of liquidation sales through pricing
adjustments and/or joint development arrangements.  This change in
strategy resulted in a third quarter 1996 $85.0 million reserve for
real estate assets.  In December of 1996 all real estate
properties, except for one, were sold for cash and assumption of
certain liabilities.  The property not included in the December
1996 sale was sold on July 30, 1997.  In anticipation of the sale
of this single remaining property, the Company reversed $6.3
million of excess reserves in June 1997.  Segment operating income
of $8.7 million reflects this reversal and compares to a $88.5
million loss for the first nine months of 1996, which included the
$85.0 million reserves.

    OTHER.  Interest expense for the nine months ended September
30, 1997 decreased to $10.9 million, from $21.1 million in the
comparable period in 1996.  The decrease is primarily due to the
repurchase  of  a  substantial  portion  of  the  Company's  Senior 






                                     -11-

<PAGE>

Discount Debentures and the paydown of the Company's revolving
credit facility in the second half of 1996.  The $1.6 million
extraordinary loss in the second quarter of 1996, which consists of
premiums paid and deferred debt costs associated with the
repurchase of discount debentures, was reclassified from interest
expense during the fourth quarter of 1996 and is so classified in
the prior year's Statement of Earnings included in this quarterly
report.  The overhead expenses in the first nine months of 1997 of
$14.7 million and $16.2 million in 1996 are above historical levels.  
The 1997 corporate expenses include $5.8 million incurred in connection 
with the severance payments made to the former Chief Executive Officer 
of the Company.  Higher than normal corporate expenses were also attributed 
to above average proxy solicitation costs incurred in connection with the 
1997 Annual Meeting of Stockholders, due to the contested nature of the
meeting.  The 1996 corporate expenses included an increase in
employee benefit costs.  The income tax provision for the first
nine months of 1997 was $.5 million compared to $1.6 million in the
comparable period in 1996.  Due to unrecognized federal tax
carryforward benefits, primarily the result of losses in the
Company's real estate segment, the Company has no Federal tax
provision in the 1996 or 1997 period; the tax provision is
primarily for state jurisdictions.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

    At September 30, 1997, the Company had $41.0 million in cash
and cash equivalents and net working capital of $105.7 million. 
Cash generated from operating activities for the nine months ended
September 30, 1997 of $2.7 million includes earnings, and an
increase in accounts payable and accrued expenses, offset by cash
used to increase inventories, and an increase in prepaid expenses
and other assets.  Cash generated from operations during the first
nine months of 1996 was $174.5 million, due primarily to receipt of
the airbag royalties litigation payment settlement from TRW.  Cash
used in investing activities during the nine months ended September
30, 1997 was $2.7 million, consisting primarily of capital
expenditures and investment in a joint venture producing airbag
components offset by proceeds from the sale of assets of a
subsidiary and a product line and the collection of an income tax
refund receivable.  Cash used in financing activities of $7.8
million reflects the repurchases of the Company's common stock, the
payment of preferred stock dividends, and a decrease in the
Company's long-term debt.  There were no borrowings under the
Company's line of credit during this period.
    In October 1993, the Company completed a major refinancing
program.  This refinancing program included an offering of $185
million of debt securities, consisting of $70 million gross
proceeds of Senior Discount Debentures due 2005, issued by the
Company to yield 12.25%, and $115 million of Senior Notes due 2003, 






                                 
                                     -12-

<PAGE>

with an interest rate of 10.75% issued by a wholly owned subsidiary
of the Company, Talley Manufacturing and Technology, Inc. ("Talley
Manufacturing").  In connection with this refinancing, Talley
Manufacturing obtained a secured credit facility with institutional
lenders.
    Borrowings under the secured credit facility may not exceed
the collateral base as defined in the governing credit agreement. 
The facility consists of a five-year revolving credit facility of
up to $40.0 million and a five-year $20.0 million term loan 
facility.  At September 30, 1997 availability under the total
facility  was approximately $49.0 million, of which approximately
$9.0 million (the principal balance of the term loan) was borrowed.
A substantial portion of the proceeds received in 1996 from the
sale of the assets of the real estate operations and from the
resolution of the automotive airbag royalties litigation have been
used to reduce the Company's total indebtedness.
    The Company has recently entered into a joint venture
agreement with Delphi Automotive Systems to manufacture automotive
airbag inflators, which will require significant capital
contributions through 1998 to fund the capital requirements of the
venture, as it develops its manufacturing capability.  In addition,
the Company is expected to have capital requirements to develop its
manufacturing capability for other airbag related products.  The
Company is also committed to significantly higher-than-normal
research and development expenditures for automotive airbag
inflators and other airbag related products.  These commitments
will require financial resources in the next two to three years.
The Company believes with present cash balances and cash available
under the Company's credit facility, there will be sufficient
financial resources to meet these needs and to support the long-
term growth of the Company's core businesses.
    As a holding company with no significant operating or income-
producing assets beyond its stock interests in Talley
Manufacturing, the Company is dependent primarily upon
distributions from Talley Manufacturing to meet its funding
requirements.  Furthermore, because certain debt covenants limit
the Company's ability to incur additional indebtedness, the Company 
will be dependent upon the payment of dividends from Talley
Manufacturing (which payments are limited by debt covenants of
Talley Manufacturing) and to any future sales of equity securities
as its primary sources of discretionary  liquidity.  Nevertheless,
and particularly in light of the current September 30, 1997 cash
balances of $26.6 million held at the parent holding company level,
the Company believes that funds will be available to permit the
Company to meet its requirements.











                                     -13-

<PAGE>

OTHER MATTERS

  Agreement and Plan of Merger
  ----------------------------

    On September 26, 1997, the Company announced that it had
entered into a definitive Agreement and Plan of Merger (Agreement)
with Carpenter Technology Corporation (Carpenter) to be acquired
for cash.
    Under the terms of the Agreement, Carpenter commenced an all-
cash tender offer on October 2, 1997 for all outstanding shares of
Talley stock at a price of $12 per share of Talley Common stock,
$16 per share of Talley Series B Preferred stock, and $11.70 per
share of Talley Series A Preferred stock.  Assuming a majority
(measured by aggregate voting power) of Talley's stock is duly
tendered under the tender offer and not withdrawn before the
expiration date of the offer (December 4, 1997, unless extended),
Carpenter is obligated under the terms of the Agreement to purchase
all shares of Talley stock tendered and not withdrawn, and is
further obligated to complete as soon as possible an all-cash
merger whereby all Talley shares remaining outstanding will be
acquired for cash at the same per-share prices as under the tender
offer.  The tender offer is also subject to other customary
conditions, including expiration of the Hart-Scott-Rodino (HSR)
waiting period.  The U.S. Department of Justice, Antitrust Division
(DOJ) has requested that the Company and Carpenter provide DOJ
certain additional information, which has the effect of
automatically extending the HSR waiting period.  The Company and
Carpenter have advised DOJ that they intend to provide the
requested information as soon as possible.
    In connection with the tender offer and proposed merger,
Carpenter, the Company and certain of its present and former
directors were named as defendants in various purported class
action complaints filed on behalf of the stockholders of the
Company.  The complaints alleged, among other things, breach of
fiduciary duty on the part of the Board of Directors arising out of
the Merger Agreement and failure to disclose material information. 
On October 16, 1997 a Memorandum of Understanding was entered into
by counsels for the plaintiffs and defendants requiring the Company
to amend and supplement the disclosure contained in its filings
with the Securities and Exchange Commission-Schedule 14D-9.  In
exchange, the plaintiffs agreed to dismiss the actions.  The
settlement is subject to various conditions, including Court
approval.
    The foregoing summary of certain provisions of the Agreement
is general in nature and is qualified in its entirety by reference
to the definitive Agreement, which is an Exhibit to this Report. 
No assurance can be given that the conditions to the consummation
of the tender offer and the merger under the Agreement will be
fulfilled or as to the timing for consummation of the tender offer
or the merger.





                                     -14-

<PAGE>

  Litigation - TRW Inc.
  ---------------------

    A judgment in the Company's favor in the amount of $138.0
million was entered against TRW Inc. (TRW) by the United States
District Court for  the  District of Arizona in June 1995 following
a jury verdict that TRW had repudiated and breached the April 1989
Airbag Royalty Agreement with the Company.  The $138.0 million
damages amount represented the jury's calculation of the present
value of the remaining stream of Airbag Royalties which would have 
been payable by TRW through the April 2001 scheduled expiration
date of the Airbag Royalty Agreement had TRW not breached the
Agreement.  TRW appealed the judgment, and, during the pendency of
the appeal, was ordered by the District Court to  continue making 
quarterly payments to the Company in the same amounts as if the
Airbag Royalty Agreement had not been terminated and repudiated by
TRW.  On June 19, 1996, the United States Court of Appeal for the
Ninth Circuit rejected TRW's appeal and affirmed the $138.0 million
judgment.  A petition for rehearing filed by TRW with the Court of
Appeals was denied on July 30, 1996.
    In August 1996 TRW made payments aggregating approximately
$133.1 million to the Company on account of TRW's obligations under
the judgment.  The payments represented the $138.0 million face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%), less the
quarterly payments made by TRW pursuant to the District Court's
order during the pendency of the appeal.  A further payment was
made by TRW at the same time in the amount of approximately $6.7 
million as that portion of a court-ordered reimbursement of
litigation fees and costs (and interest on the reimbursement amount
at the same default rate).
    During  September  1996, claims  between  the  Company  and
TRW (which had been scheduled for trial) and all other matters in 
dispute with TRW were settled by the parties pursuant to a global
settlement agreement.  Under that settlement, TRW made a further
cash payment to the Company on September 3, 1996 in the aggregate
amount of $16.6 million.  Accordingly, all claims between the
parties have now been resolved, and cash payments have been made by
TRW aggregating $156.4 million.
    The litigation in which this judgment was entered arose out of
the Asset Purchase Agreement dated February 4, 1989 and the License
Agreement dated April 21, 1989, between TRW and the Company
pursuant to which TRW acquired the Company's airbag business.  The
court dismissed TRW's claims that the Company had breached a non-
compete provision contained in the Asset Purchase Agreement,
thereby entitling TRW to terminate airbag royalty payments to the
Company under the License Agreement (which it purported to do in
February 1994) and obtain a paid-up license to use the Company's
airbag technology.  The jury found in fact that TRW had improperly
terminated and repudiated the License Agreement.






                                     -15-

<PAGE>

  Recently Issued Accounting Standards
  ------------------------------------

    In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per Share" which is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods.  Under the provisions of this new pronouncement,
the Company is required to present Basic Earnings per share and
Diluted Earnings per share.  Basic Earnings per share is computed
by dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the
denominator) during the period.  Income available to common
stockholders is computed  by  deducting  both dividends declared in 
the period on preferred stock (whether or not paid) and the
dividends accumulated for the period on cumulative preferred stock
(whether or not earned) from income from continuing operations and
also from net income.  Diluted Earnings per share is computed
similar to Basic Earnings per share, except that the denominator is
increased to include the  number of additional common shares that 
would have been outstanding if the dilutive potential common shares
had been issued.  Under this new pronouncement, the Company is
required  to  disclose a reconciliation  of  the numerators and the
denominators of the basic and diluted per-share computations for
income from continuing operations, the effect that has been given
to preferred dividends in arriving at income available to common
stockholders in computing basic earnings per share, and securities
that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive
for the period(s) presented.
    Had this Statement been effective for the nine months ending
September 30, 1997, the Basic Earnings per share and the Diluted
Earnings per share would have been $.42 and $.42, respectively.
    In June 1997, the Financial Accounting Standard Board issued
SFAS No. 130 "Reporting Comprehensive Income", and SFAS No. 131
"Disclosure about Segments of an Enterprise and Related
Information".  Both pronouncements are effective for fiscal years
beginning after December 15, 1997.  The new requirements for
reporting comprehensive income will have minimal impact on the
Company's financial statement disclosures since items addressed by
the pronouncement, not presently included in its income statements,
are minor in amounts.  The Company anticipates that its reportable
operating segments may change and may increase in number based on
the requirements of the new standard on disclosures about segments.

Forward-Looking Statements
--------------------------

    This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this
Quarterly  Report  contain  forward-looking  statements  that  are
based on current expectations, estimates and projections about the 



                                     -16-

<PAGE>

industries in which the Company operates.  Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions 
are intended to identify such forward-looking statements.  These
statements are not guarantees of future performance and involve 
certain risks, uncertainties and assumptions which are difficult to
predict.  Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-
looking statements.  The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
    Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely and cost
effective basis; the mix of products/services; the achievement of
lower costs and expenses; domestic and foreign governmental and 
public policy changes including environmental regulations;
protection and validity of patent and other intellectual property
rights; reliance on large customers; the cyclical nature of certain
of the Company's businesses; the outcome of pending and future
litigation and governmental proceedings and continued availability
of financing, and financial resources in the amounts, at the times 
and on the terms required to support future business.  In addition,
such statements could be affected by general industry and market
conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange
rate fluctuations and other factors.



























                                     -17-

<PAGE>

                   PART II - OTHER INFORMATION


Item 1.  Legal Proceedings
--------------------------

  Litigation - TRW Inc.
  ---------------------

    For a description of legal proceedings involving the Company, 
    see "Other Matters" within Management's Discussion and
    Analysis.

Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------

(a) Exhibits:

     10.1 *  Severance and Settlement Agreement between  William
             H. Mallender and Talley Industries, Inc. dated  June 
             21, 1997.

     10.2 *  Employment Agreement dated August 11, 1997 between
             the Company and Paul L. Foster.

       11 *  Computation of Earnings per Common and Common
             Equivalent Share.

       27 *  Financial Data Schedule for Talley Industries, Inc.,
             September 30, 1997.

     99.1 *  Ninth Amendment to the Loan and Security Agreement
             dated July 31, 1997 by and among Talley Manufacturing
             and Technology, Inc. and Transamerica Business Credit
             Corporation.

     99.2 *  Form of Fourth Amendment to Subsidiary Loan and
             Security Agreements dated July 31, 1997 between
             Talley Manufacturing and Technology, Inc. and each of
             certain subsidiaries.

      99.3   Agreement and Plan of Merger among Carpenter
             Technology Corporation, Score Acquisition Corp. and
             Talley Industries, Inc. dated September 29, 1997
             included as Exhibit B to Schedule 14D-9 filed October
             2, 1997, incorporated herein by reference.

* Documents marked with an asterisk are filed with this report.


(b) Reports on Form 8-K:

       There were no reports filed on Form 8-K for the three
       months ended September 30, 1997.


                                     -18-

<PAGE>

                            SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.




                                   TALLEY INDUSTRIES, INC.    
                                   -----------------------------
                                   (Registrant)







Date: November 5, 1997             By /s/  Kenneth May                
     -----------------------          --------------------------
                                      Kenneth May
                                      Vice President, Controller
                                      Principal Accounting
                                      Officer






Date: November 5, 1997             By /s/  Mark S. Dickerson          
     -----------------------          --------------------------
                                      Mark S. Dickerson
                                      Vice President 
                                      and Secretary
                                   
















                                     -19-